PCAOB says post-Sarbanes-Oxley audits still deficient

Dec 9th 2008

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The Public Company Accounting Oversight Board has released a report summarizing the inspection findings of the eight domestic accounting firms that were subject to annual inspections over the past four years.

The PCAOB focuses its inspections on those areas of an audit likely to pose the most significant challenges for an auditor or to pose the most significant risk to investors of misstated financial statements. These include areas that are fundamental to any audit, such as testing of revenue, as well as areas that pose increasingly challenging issues in current market conditions, such as testing of fair value measurements.

The report describes deficiencies observed in these areas, as well as deficiencies in the following additional audit areas: identifying departures from generally accepted accounting principles (GAAP), auditing of management's estimates, income taxes, and internal control, performing analytical procedures and audit sampling, using the work of specialists, and assessing materiality, audit scope and audit differences.

The report also includes information on changes in the quality control systems that firms have described in remediation plans submitted in response to the first years of inspection reports. These include changes to their structure, partner evaluation processes, internal inspection programs, procedures for using the work of foreign affiliates, and processes for compliance with independence requirements.

"The Board's focus on improvements in the firms' audits and quality control systems is critical to our mission to protect investors. This report describes areas where we have found problems, and notes steps the firms have undertaken in response to certain quality control criticisms," said Mark W. Olson, PCAOB Chairman.

George Diacont, Director of the PCAOB Division of Registration and Inspections, added, "While we are encouraged by the efforts of firms to remediate quality control deficiencies that we have observed, the report highlights the need for continued focus on performing high quality audits. Even in recent years, we are seeing deficiencies in the most important and high-risk areas of the audits, where appropriate levels of care and professional skepticism are needed."

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The eight domestic firms covered by this report (BDO Seidman, LLP; Crowe Chizek and Company LLC; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; KPMG LLP; McGladrey & Pullen, LLP; and PricewaterhouseCoopers LLP) -- that have been inspected annually for each of the past four years -- are together responsible for the audits of approximately 66 percent of all U.S.-based public companies. Four of these firms audit public companies representing 98 percent of the total U.S. market capitalization.

Each of the firms included in this report is based in the United States and has maintained more than 100 public company audit clients over the past four years. During the period covered by the report, PCAOB inspectors reviewed a selection of the firms' audits of client financial statements for 2003 to 2006.

The report is based on annual PCAOB inspections from 2004 to 2007, which included, among other things, reviews of aspects of more than 1,600 audits. Some of the information in the report has previously been reported in public portions of inspection reports on the individual firms; but the report also includes information not previously made public. Consistent with the Sarbanes-Oxley Act and the Board's Rule 4010, any otherwise nonpublic information from the PCAOB's inspection process that is included in the report does not identify the particular firm or firms to which the information relates.